Venture capital: A key to economic development of Bangladesh
Syed Ejaz Ahsan
The Financial Express, 24.09.2012
The economy of Bangladesh has for some time been on a momentum of growth. As a result, the country is experiencing growth in almost every sector. The growth in manufacturing and agriculture is viewed as vital for any growing economy. At the same time, the precondition for steady and sustained industrial and agricultural growth is more capital and investment. But as we know, arranging capital is always a great obstacle to Bangladesh. Normally, the new ventures at their growth stage face many challenges like brand establishment, market expansion, human resource development, with the most critical one being arranging the required capital.
As per statistics, the country is providing Tk 400 billion (Tk 40,000 crore) as bank loan. The larger portion of this loan is being absorbed by the large corporate bodies. Corporate bodies can manage any amount of loan because they have collateral securities, and even sometimes they manage funds only through providing corporate guarantee. But for the new ventures it is a great problem.
Banks and financial houses always prefer to provide loan to the large corporate bodies to avoid the hassles of documentation, processing and consideration of security of the said loan amount; such loans are also easy to monitor. So it is interesting that getting a loan amount of Tk 100 thousand (Tk one lakh) is more difficult than managing a Tk 10-million loan. But providing loan in such a way has already proved to be dangerous for the banking sector and the overall economy.
One side of such practice is, it restricts the much expected growth of SMEs (small and medium enterprises), which create employment, boost economic growth and develop and balance other macro-economic factors. By taking advantage of the size, the corporate bodies may misappropriate the loan or use it for a different purpose not related to the original one for which they obtained loan from the bank. Afterwards, all we know of the story is that the loan turns into a classified one. Most of the time, banks fail to recover their money, the security provided against the said loans prove to be insufficient to recover the debts.
Classified loans amounting to thousands of millions of Taka left unrealised lower the capability of banking sector to advance further loans. It in turn shrinks the employment opportunity and growth prospects of the country. On the other hand, prospective small and medium scale entrepreneurs face difficulties in getting adequate capital for their existence and expansion.
At this stage, emergence of venture capital shows a fresh light of hope for our entrepreneurs and the economy as a whole. Although the venture capital system of financing is nothing new to the developed economy, for Bangladesh venture capital is a new addition to our existing financial and banking products. The newly formed venture capital company named Bangladesh Venture Capital is playing a pioneering role in introducing a new financing system in Bangladesh. Before discussing the effectiveness and importance of this venture, there is the need to shed light on the functional aspects of the system in brief.
Venture capital (VC) is financial capital provided to early-stage, high-potential, high-risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding-round as growth funding-round (also referred to as Series A round) in the interest of generating a return through an eventual realisation event, such as an IPO or trade sale of the company. Venture capital is a sub-set of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.
In addition to ‘angel investing’ and other seed-funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 2.0 per cent of US GDP), the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and 600-800 get venture capital funding. According to the National Venture Capital Association, 11 per cent of private sector jobs come from venture-backed companies and venture-backed revenue accounts for 21 per cent of US GDP.
It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in the areas of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.
We can see even for an economy like the USA how important a role the venture capital is playing. Eleven per cent job creation in an economy like the USA is a tremendous achievement in any consideration. It can also play vital role in our economy. Though initially one company has come forward with a small capital-base of only Tk 500 million (Tk 50 crore), it is expected that more such companies will gradually emerge on the scenario.
Venture capital firms differ in their approaches. There are multiple factors, and each firm is different. Some of the factors that influence venture capital (VC) decisions include:
* Business situation: Some VC firms tend to invest in new ideas, or fledgling companies. Others prefer investing in established companies that need support to go public or grow.
* Some invest solely in certain industries.
* Some prefer operating locally while, others will operate nationwide or even globally.
* VC firms’ expectations often vary. Some may want a quicker public sale of the company or expect faster growth. The amount of help a VC firm provides can vary from one company to the other.
Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist’s return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist “exits” by selling its shareholdings, when the business is sold to another owner.
If we go into the details, we see that a large number of small firms are there in Bangladesh with sufficient growth potential, which can avail venture capital funding and grow gradually. Although the venture capitalists take the decision after thorough analysis and careful observation, still there is no shortage of prospective and faster-growth potential firms and entrepreneurs in Bangladesh. In this connection we can mention some sectors which have got tremendous growth potential, but are unable to grow due to lack of capital. These include light engineering, spare auto-parts and other machinery parts, manufacturing industries, mid-level agriculture and food processing industries, forestry, IT software, tourism and hospitality industry and many more.
The banks and leasing companies in the country are stuck in the traditional way of funding and financing the large and established companies and working in and around the metropolitan areas of Dhaka, Chittagong and Sylhet. For faster economic funding, facilities should be focused on the growth potential of employment generating SMEs. If venture capital firms can come forward with a dynamic vision along with professional transparency, then it is going to open a new horizon for the economy of Bangladesh and take the nation’s economy to a new height of excellence.
(Data sources: The Internet, Wikipedia)
The writer is a PhD researcher at Dhaka University.